How Regulators Should Treat Virtual Currencies

Regulators have turned an alert eye on the emerging virtual currency market, and it is only a matter of time before they formulate anti-money laundering and fraud prevention rules specific to the new market.

The Liberty Reserve case a couple of weeks ago demonstrated remarkable coordination among law enforcement and regulators, as agencies from 17 different countries worked together to investigate the virtual currency provider. “That’s a lot of coordination that we shouldn’t take for granted,” Joram Borenstein, the senior director of product marketing for NICE Actimize , says. “The case makes it clear that regulators will look at your business very carefully to determine who your customer is. It really boils down to Know Your Customer.”

Borenstein points out that FinCEN, the arm of the Treasury Department that handles anti-money laundering cases, released a report earlier this year that urged regulatory agencies to subject virtual currency to the same level of scrutiny as traditional currency.

It may be difficult in some cases to hold virtual currency providers to that same standard, or to hold them to the same anti-money laundering requirements as banks. There could be scenarios where those requirements may not make sense for virtual currency, Borenstein explains. But virtual currency providers are definitely going to be required to know who they are dealing with and be able to prove that to regulators, he remarks.

They will also have to prove that they can secure accounts and authenticate their customers, Borenstein notes, and that could be one area where their methods may differ from traditional players. New providers could take advantage of the security capabilities of mobile phones - such as voice recognition - to help authenticate their customers, he says.

It will likely take some time for regulators to figure out exactly how to approach virtual currencies. “I think the situation is at a crossroads. It’s a lot like when PayPal first came out,” Borenstein recalls. “It was a new way to pay people, and took a little while for regulators to get it. I think that with virtual currency it will be a comparable narrative.”

And Borenstein is confident that regulators will figure out an appropriate way to handle virtual currency providers. “I think the regulators have shown an aptitude for in understanding new technologies and keeping tabs on new developments in the market,” he says. Virtual currency has caught the eye of regulators, as the Liberty Reserve case shows, and it is only a matter time before regulators draw up specific rules for providers.

Jonathan Camhi has been an associate editor with Bank Systems & Technology since 2012. He previously worked as a freelance journalist in New York City covering politics, health and immigration, and has a master's degree from the City University of New York's Graduate School ... View Full Bio